Cruel Summer! 12 April 2024
With RERA’s March amendment to its rental index, that allowed property owners to increase rents to bring them in line with the market value, many landlords in Dubai have started increasing rents upon renewal of their tenancy contracts. It is noted that under the amended rules, landlords can only increase the rent at the time of tenancy renewal, so for many, the impact will not be felt until towards the end of the year. The main “casualties” will be those tenants who have been staying in their property for more than two-years. Most of that sector had benefitted at the time because the then RERA guidelines had heavily restricted how much landlords were allowed to increase the rent, so it was more economical to stay in their existing unit rather than paying the much higher market rate if they had moved.
Starting this month, landlords are now required to attach a judgement or legal order to apply for the rent evaluation service. However, landlords must notify tenants of any rent increase, via registered email, ninety days before the current lease expires. There has been a sharp rise in landlords seeking rental valuations to increase the rent over the past year, with the rental valuation superseding the rental index. After years of low or no increases, the latest index revision will permit many landlords to increase rents by a larger percentage than before which in turn will close the gap with market prices. This in turn may have a double whammy on the sector – an increasing number of current tenants either in the market to rent a new property or make the decision to buy. Since 2021, the rental market has exploded but although now still in positive territory, the rate will slow, as rising new housing handovers enter the market in Q4 and onwards, especially in outlying areas where costs are cheaper.
This “new” rent increases are estimated to be in the region of half the difference between the current rent and the calculated market value:
- Less than 10% below market value: No increase allowed
- 11% to 20% below market value: 5% increase permitted
- 21% to 30% below market value: 10% increase permitted
- 31% to 40% below market value: 15% increase permitted
- 41% or more below market value: 20% increase permitted
The current owners, Investment Corporation of Dubai and Brookfield Corporation, of ICD Brookfield Place have agreed to sell a 49% stake in the fifty-three storey tower to Abu Dhabi-based global alternative investment management company Lunate, through one of its funds, and Saudi Arabia’s Olayan Financing Company; each of the two new companies will have a 24.5% stake, whilst both sellers will retain 25.5% shares. No financial details of the agreement were released but it is the largest institutional third-party single asset real estate transaction in the UAE and one of the biggest commercial real estate transactions globally since 2020. The property has 92k sq mt of office space, about 15k sq mt of retail space and 13k sq mt of green space. Since its September 2020 opening, the property “has become a major landmark and the most coveted address in Dubai for businesses and leisure alike”, with Murtaza Hussain, managing partner at Lunate, noting that its investment in ICD Brookfield Place is aligned with its “long-term capital strategy to invest in premium assets, delivering attractive yields and capital appreciation”. Brookfield Properties will continue to manage the property, which is more than 98% leased at “premium” rents to global financial institutions, law firms and MNCs.
On Monday, HH Sheikh Mohammed bin Rashid issued a decree to establish a new body to resolve jurisdictional conflicts between Dubai courts, (including the Court of Cassation, the Court of Appeal and the Court of First Instance, and any other court that will be set up as part of the judicial authority in Dubai), and the DIFC, which will help streamline the justice system and enhance the efficiency of the judicial process; it will replace a previous tribunal with a new authority having a broader mandate. A jurisdictional conflict may arise when a company based in DIFC has a dispute with a firm based on the mainland, and there are questions over which court should handle the case. The president of the Court of Cassation will head the new body with the deputy chief justice of DIFC Courts serving as deputy chairman; other members of the authority include the secretary general of the Dubai Judicial Council, the president of the Court of Appeal, the president of the Court of First Instance, and two DIFC Courts judges, selected by the chief justice of DIFC Courts. The authority will determine the competent court for disputes, specifying enforceable judgments in case of conflicts, and implementing tasks assigned by the Ruler of Dubai or the chairman of the Dubai Judicial Council, with the authority’s decisions being final and not subject to appeal in any form.
Ahead of Eid Al Fitr, President HH Sheikh Mohamed bin Zayed Al Nahyan issued a directive to settle the outstanding financial dues of students enrolled in UAE government schools, amounting to a total cost of over US$ 42 million; this will cover all outstanding fees for the academic year 2023-2024. This move not only enables students to focus more on their studies but also eases the financial obligations on both students and their families. In collaboration with Emirates Schools Establishment, President HH Sheikh Mohamed highlighted the importance of education by extending support to students and enhancing their motivation to succeed in their studies.
Last year, National Bonds distributed US$ 790 million in profit pay-outs and prizes, with residents investing US$ 272k (AED 1 million) or more in saving bonds receiving 5.84% returns, while those who had investments between US$ 95k and US$ 272k, (AED 350k and AED 1 million), earning 4.22%. NB also reported an annual 215% increase in new savers in 2023. On 27 March, National Bonds launched the “Eibor Plus” scheme, with a minimum investment of US$ 7k, (AED 25k), which tracks the Emirates Interbank Offered Rate, providing investors with an expected return of 0.5% above the benchmark’s performance on an annual basis. Sector wise, its portfolio is split between fixed income assets, real estate, money markets, listed equities and alternatives – 43%, 26%, 19%, 11% and 1% – and location-wise investments emanate from UAE, international and GCC – 55%, 33% and 12%.
After being closed for the previous week because of the Eid Al Fitr holiday, the DFM will open next week on Monday 15 April 18 points (0.4%) lower the previous three weeks. Emaar Properties, US$ 0.09 higher the previous fortnight, will open on US$ 2.32. DEWA, Emirates NBD, DIB and DFM will open on US$ 0.65, US$ 4.78, US$ 1.57 and US$ 0.39. On 05 April, trading was at 112 million shares, with a value of US$ 59 million.
In the week’s trading prior to the Eid Al Fitr holiday, UAE stock markets attracted liquidity of nearly US$ 1.77 billion, driven mainly by the real estate, financial and banking sectors. Abu Dhabi accounted for US$ 1.25 billion (70.6%) and Dubai US$ 0.52 billion (29.4%) of the total weekly trades, with about 113.6k transactions as 2.3 billion shares changing hands. By the end of the week on Friday 05 April, the market caps for Abu Dhabi and the DFM reached US$ 774.1 billion, (79.7%) and US$ 197.3 billion, (20.3%), totalling US$ 971.4 billion. Over the week, the three most active trading companies were Emaar Properties, Union Properties and Emaar Developments – with trades totalling US$ 117 million, US$ 54 million and US$ 37 million. The three highest weekly increases in market caps were National General Insurance, (14.6%), Ethmar International Holding, (7.4%), and Union Properties (6.4%).
By Friday, 12 April 2024, Brent, US$ 8.74 higher (10.2%) the previous four weeks, shed US$ 0.10 (0.1%) to close on US$ 90.74. Gold, US$ 427 (22.9%) higher the previous six weeks, gained US$ 64 (2.7%) to trade at US$ 2,356 on 12 April 2024.
Yesterday, OPEC stuck to its forecast for relatively strong growth in global oil demand this year, with world oil demand set to rise by 2.25 million bpd in 2024 and by 1.85 million bpd next year. Last week, OPEC and OPEC+ agreed to keep oil output cuts in place until the end of June, with its latest report noting that “despite some downside risks, the continuation of the momentum seen in the beginning of the year could result in further upside potential for global economic growth in 2024”. It expects that Q2 fuel demand will rise by 600k bpd, year on year, gasoline by 400k bpd and diesel by 200k bpd. There is a wider than usual split between forecasters on the strength of oil demand growth in 2024, with OPEC, energy trader Vitol, the IEA and the US government energy forecaster posting daily figures of 2.25 million bpd, 1.9 million bpd, 1.33 million bpd and 950k bpd respectively.
Last month, global food prices headed north for the first time in seven months, by 1.1% to 118.3 points, but down 7.7% on the year. The Food and Agriculture Organisation posted that the main drivers were higher costs of vegetable oils, 8.0% higher to 130.6 points on the year, and dairy products rising for the sixth consecutive month – but still 8.2% lower on the year. Although March meat prices rose 1.7%, there was still a 1.5% decline from March 2023. The FAO noted that global poultry prices rose, underpinned by “continued steady import demand from leading importing countries, despite ample supplies mostly sustained by reduced avian influenza outbreaks in major producing countries”. Although March prices of bovine meat continued to nudge higher, mainly due to higher purchases by leading importing countries, ovine meat prices dipped, attributable to a surge in supplies exceeding seasonal levels, especially from Australia.
The global body has raised its 2023/24 forecast for world cereal production to 2,841 million tonnes, (1.3% higher on the year), with year-end cereal stock, up 2.3%, at 894 million tonnes. World trade in cereals is forecast to rise 1.7% to 485 million tonnes in 2023/24, whilst trade in coarse grains is expected to expand from 2022/23, with wheat and rice trade likely to contract. 2024 wheat production is likely to come in 1.0% higher in the year at 796 million tonnes. Harvesting for coarse grain crops has already started in the southern hemisphere and although Argentina’s output is expected to rebound, after the drought-impacted outturn of 2023, smaller outputs are expected in Brazil and across Southern Africa. The sowing in the northern hemisphere will begin shortly.
February cereal prices declined 2.6% for the third consecutive month, whilst posting its biggest annual decline of 20.0%, driven by sustained export competition among the EU, the Russian Federation and the US, enhanced supplies, cancelled wheat purchases by China (from both Australia and the US) and favourable crop prospects for the 2024 harvest in the Russian Federation and the US. Because of higher buying interest, and supply issues in Ukraine, maize prices inched higher.
Although on the year, sugar prices were 4.8% higher, (being the only commodity to post annual increases), they have been heading lower in 2024, driven by the upward production forecast in India and the improved pace of harvest in Thailand. Brazil, the other country in the sugar trifecta, was negatively impacted by prolonged dry weather, that “continued to exacerbate seasonal trends and limited the price decline”. Furthermore, higher international crude oil prices helped contain the decrease in sugar prices.
Having disclosed that world trade volumes unexpectedly declined by 1.2% in 2023, the WTO expects a rebound this year, to 2.6%, (and 2.7% in 2025), with the caveat that this could be derailed by regional conflicts, geopolitical tensions and economic policy uncertainty. Last year’s negative results were down “mainly due to the worse-than-expected performance of Europe,” with lingering high energy prices and inflation driving down demand for manufactured goods. In Q4, the eurozone economy stagnated, with Germany’s economy contracting by 0.3%. However, as inflation continues to decline – albeit at a much slower rate than initially expected – the world body expects merchandise trade volumes to increase by 2.6% in 2024, and by 3.3% next year. The WTO said trade developments on the services side were far more upbeat last year, growing by 9.0%, with major contributions from the upcoming the Olympic Games in Paris and the European football championships in Germany.
Mainly owing to higher costs for fuel, housing, dining out and clothing, March US consumer prices rose faster than expected, up 0.3% on the month at 3.5% – a sure indicator that the fight to slow inflation has stalled, and the distinct possibility that the Federal Reserve will have to maintain rates at their current level, 5.25% – 5.50%, or even push them higher – at least for this year. The logic behind this is that high interest rates make it more expensive to borrow for business expansions and other spending that results in slowing the economy and stabilising prices. Economic data, including strong jobs creation figures last week, has raised doubts about how soon those cuts might come, with rates having fallen from their 2022 high of 9.1%. Even Jamie Dimon, the head of JPMorgan Chase, has warned US interest rates could climb to 8% because of “persistent inflationary pressures”.
Citing risks to public finances, and following a similar move by peer Moody’s, Fitch has cut its outlook on China’s sovereign credit rating to negative. This comes as Beijing ratchets up efforts to spur a feeble post-Covid recovery with fiscal and monetary support, with the credit rating agency noting “Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt,” and “this does not mean that China will default any time soon, but it is possible to see credit polarization in some LGFVs especially as provincial governments see weaker fiscal health.” It noted that the country’s central and local government debt is set to rise to 61.3% of GDP this year from 56.1% in 2023, and 38.5% in 2019. It also expects that the country’s general government deficit – which covers infrastructure and other official fiscal activity outside the headline budget – to rise 1.3% to 7.1% of GDP. Its struggling property sector has impacted negatively on the general economy and its downturn, starting in 2021, has resulted in local governments’ revenue plunging and pushing debt levels to unsustainable levels. Fitch forecast China’s economic growth would slow 0.7% to 4.5% this year – almost the same as the IMF’s 4.6%.
InfluenceMap, a UK non-for-profit think tank, reports that most fossil fuel companies have produced more emissions since the 2015 Paris Agreement was signed, and that 75% of the fossil fuel and cement emissions since then have come from just fifty-seven producers, with 14.7% emanating from ten energy giants, as listed below. The following four Australian companies are included in the database – BHP, Woodside, Santos and Whitehaven Coal – with three of them posting increased emissions since 2016, as BHP had a “significant” decrease in emissions. Overall, China’s national coal production has been the biggest single source of pollution, accounting for 14% of global historical emissions, with the former Soviet Union coming in second. The agency hopes that the released data will assist in holding companies to account and assist in climate litigation. Indeed, the database was cited in a recent case in which a Belgian farmer argued that an oil and gas company was partly responsible for damage to his farm from extreme weather. Academics are also using the data that allows them to quantify the contribution that the emissions by these producers have made to, inter alia, sea level rise, forest fire risk etc. The report traces emissions as far back as the Industrial Revolution, when humans began burning fossil fuels and emitting increasing amounts of carbon into the atmosphere. Interestingly, the Paris Agreement also marked a change in coal emissions; while investor-owned coal companies have reduced their output since 2015, coal emissions from state-owned companies have increased.
| Total emissions (MtCO2e) | %age of global CO2 emissions | |
| Chevron | 57,898 | 3.0% |
| ExxonMobil | 55,105 | 2.8% |
| BP | 42,530 | 2.2% |
| Shell | 40,674 | 2.1% |
| ConocoPhillips | 20,222 | 1.0% |
| Peabody Coal Group | 17,735 | 0.9% |
| TotalEnergies | 17,584 | 0.9% |
| Occidental Petroleum | 12,907 | 0.7% |
| BHP | 11,042 | 0.6% |
| CONSOL Energy | 1,709 | 0.5% |
In Q1, China posted car production 6.4% higher on the year to 6.6 million vehicles, and sales up 10.6% to 6.72 million units, as both passenger vehicles and commercial vehicles registered robust results. The market penetration of new-energy vehicles remained at above 30%, whereas car exports surged 33.2% to 1.32 million over the period. Being a growing pillar industry for the national economy, it continues to play an important role in stabilising growth and shoring up employment. Wang Wentao, Minister of Commerce of China, has stressed that Chinese electric vehicle manufacturers’ rapid development is a result of constant tech innovations, well-established supply chain system and full market competition, not subsidies.
A long-standing and acrimonious dispute between Disney chief executive, Bob Iger, and billionaire activist investor, Nelson Peltz, has finally come to an end. The former is seventy-one and the other is eighty-one and perhaps they could have both found a happier retirement. There is no doubt that the century old Disney empire is in a financial mess, partly due to uncertainty over the future of its legacy television businesses, several movie flops and an unprofitable streaming service, struggling in a highly competitive sector.
Iger was named president of Disney in 2000 and succeeded Michael Eisner as CEO in 2005, until his contract expired in 2020, and was followed by Bob Chapek; he then served as executive chairman until his retirement from the company on 31 December 2021. However, after his exit from the company, Iger served, at the company’s request, with a US$ 2.0 million package, as an advisor to his successor. However, at the request of Disney’s board of directors, Iger returned to Disney as CEO on 20 November 2022, following the unscheduled and immediate dismissal of Chapek. Last July, Disney renewed Iger’s contract until 2026.
Peltz had been highly critical of the direction Disney was taking to try and return to its glory days and had been buying shares in the entertainment giant so he could launch two separate bids for two seats on the board. He opined that Disney had lost its magic and could be making more money from its content and services, and that he was the right man to restore the ‘Mouse House’ to its former glory. No surprise to see that Iger had other ideas and would do anything to keep the billionaire out, with Disney reportedly investing US$ 40 million in one of the most expensive proxy battles in history, to stop Peltz from securing a seat on the board.
Events came to an end last week at Disney’s AGM, where shareholders chose to re-elect all twelve of the company-backed board members. No doubt that Iger has won this battle, but it is highly unlikely that Peltz will leave this alone and could still obtain the keys to the Magic Kingdom. He has been involved in major skirmishes, (and been successful), in the past including Heinz, Unilever and Dupont.
There are reports that Tesla has cancelled the long-promised inexpensive car that investors have been counting on to drive its growth into a mass-market automaker, but that it will continue to develop self-driving robotaxis on the same small-vehicle platform. This will be a blow for Elon Musk whose 2006 masterplan called for manufacturing luxury models first, then using the profits to finance a “low-cost family car.” Even in January this year, he indicated that the EV maker planned to start production of the affordable model at its Texas factory in H2 2025. Tesla’s cheapest current model, the Model 3 sedan, retails in the US for US$ 39k, whilst its now reportedly defunct entry level Model 2 was to retail in the region of US$ 25k. In comparison, it seems that Chinese car makers are looking to produce EVs that could retail at prices as low as US$ 10k – no wonder Tesla shares fell 5% on the news.
In an ongoing patent dispute with medical-monitoring technology company Masimo, Apple has requested a US appeals court to overturn a US trade tribunal’s decision to ban imports of some Apple Watches; the tech giant argued that the US International Trade Commission’s decision was based on a “series of substantively defective patent rulings” and that Masimo failed to show it had invested in making competing US products that would justify the order. Masimo had accused Apple of hiring away its employees and stealing its pulse oximetry technology after discussing a potential collaboration, with it convincing the ITC to block imports of Apple’s latest-edition Series 9 and Ultra 2 smartwatches after finding that their technology for reading blood-oxygen levels infringed Masimo’s patents.
A deal will see Grupo Financiero Galicia, a major private financial group, acquire HSBC’s business in Argentina twenty-seven years after the banking giant entered the country, when it took full control of the local Banco Roberts and renamed it; the bank has a payroll of 3.1k and over one hundred branches. The agreement saw a sales price of US$ 550 million that will see HSBC losing US$ 1.0 billion in the process, after years of battling with the country’s unstable exchange rate, (currently, US$ 1 equates to 860 pesos, five years ago only 43 pesos), and inflation, which in March was at 276%. Over the next twelve months, the business will also recognise US$ 4.9 billion in losses from historical currency translation reserves which had been counted in pesos – not dollars.
Some local expats may be disappointed to hear that Spain is planning to scrap a “golden visa” scheme that grants residency rights to foreigners who make investments of at least US$ 543k (eur 500k), without taking out a mortgage, in real estate, with Spanish Prime Minister Pedro Sanchez noting this move would help make access to affordable housing “a right instead of a speculative business”. From the start of the golden visa scheme in 2013 to November 2022, Spain issued almost 5k permits. Chinese investors top the list followed by Russians who invested more than US$ 3.69 billion, according to a 2023 Transparency International report. Portugal has recently revamped its own “golden visa” scheme and excluded real estate investment to tackle its housing crisis. The UN estimated in 2020 that 303k UK nationals lived in Spain, and the scheme allowed those with holiday homes in Spain to circumvent rules limiting non-EU citizens to a ninety-day stay in EU countries without needing a visa.
In Vietnam, Truong My Lan, chair of real estate company Van Thinh Phat, has been sentenced to death after being found guilty of embezzling US$ 12.5 billion – equating to almost 3% of the country’s 2022 GDP – in the country’s largest-ever financial fraud case. The court also ordered the sixty-seven-year-old tycoon to pay almost the entire US$ 27 billion damages sum in compensation. This could be seen as a major victory for the leader of the ruling Communist Party, Nguyen Phu Trong, who has pledged for years to stamp out corruption.
A further 277k Americans will benefit from President Joe Biden’s largesse, as he announces that he is cancelling US$ 7.4 million in student debt. The beneficiaries will be:
- 206.8k borrowers receiving US$ 3.6 billion, enrolled in the government’s Saving on a Valuable Education (Save) repayment plan
- 65.8k borrowers receiving US$ 3.5 billion through income-driven repayment plans
- 4.6k borrowers receiving US$ 300 million through fixes to Public Service Loan Forgiveness
To date, the Biden-Harris Administration has cancelled US$ 153 billion in debt for 4.3 million people. Last year, the US Supreme Court rejected President Biden’s initial plan to wipe away US$ 430 billion in student debt, completely erasing the outstanding balances of about twenty million people.
US Senator Sherrod Brown, the chair of the Senate Banking Committee, wrote to President Joe Biden noting that “Chinese electric vehicles are an existential threat to the American auto industry”, whilst urging him to ban imports of Chinese-made electric cars to the country; he added that “we cannot allow China to bring its government-backed cheating to the American auto industry”. This follows a White House announcement in February that it was opening an investigation into whether Chinese cars pose a national security risk, with the President noting that China’s policies “could flood our market with its vehicles, posing risks to our national security” and that he would “not let that happen on my watch.” There are also concerns that the technology in Chinese-made cars could “collect large amounts of sensitive data on their drivers and passengers”, warning cars that are connected to the internet “regularly use their cameras and sensors to record detailed information on US infrastructure; interact directly with critical infrastructure; and can be piloted or disabled remotely”. In 2023, both bilateral exports and imports headed south – by 4.0% to US$ 148 billion and over 20% to US$ 427 billion.
Rather surprisingly, state-owned China Construction Bank (Asia) has filed a US$ 202 million petition against Shimao, one of China’s major developers; as did several other peers, Shanghai-based Shimao defaulted on offshore bonds in 2022, so the bank is claiming that it should repay the loans. Despite Shimao indicating that it would “vigorously” oppose the lawsuit, its shares, which have lost a third of their value YTD, fell by more than 15% to hit an all-time low during Monday’s trading. Last month, it laid out detailed plans to restructure its debts. This latest case follows Evergrande, US$ 300 billion in debt, being ordered to liquidate by a Hong Kong court, and property developer Country Garden also defaulting on its overseas debt last year and facing a winding-up petition. The industry has yet to recover from a 2021 government move to curb the amount big developers could borrow. As the sector accounts for over a third of the country’s economy, the negative impact has been felt throughout the country and on the global stage.
Employers in the US added more than 303k jobs last month – the biggest gain in almost a year – as the boom in the world’s largest economy continued, with economists hopelessly wrong again with their monthly projections, this time expecting gains of 200k. The jobless rate fell to 3.8%, as most sectors, including health care, construction and the government added roles, with the average hourly pay was 4.1% higher on the year; an influx of more than three million immigrants last year may have helped pay rates to remain flat so as to keep a lid on wages, allowing the jobs boom to proceed without reigniting inflation. However, these figures may convince the Federal Reserve to think twice about reducing rates, currently at 5.25%-5.50% – in the near-term. Economics 101 points to keeping rates high, (and consequent high borrowing costs), may lead to a marked economic slowdown. There is no doubt that because of the strong job growth, the Fed will have its work cut out to return inflation to its 2.0% target.
A sign that the US still has a tight labour market was gleaned from the latest US Labor Department figures, for the week ending 06 April, that showed first-time applications for unemployment benefits dipped 11k to 211k more than expected last week. Although figures could be skewed somewhat, because of Easter and spring school holidays, they reflect that the labour market still remained in a healthy state. Job growth accelerated in March, while the monthly unemployment rate dipped 0.1% to 3.8 %; the number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 28k to 1.817 million during the week ending 30 March. Even though hiring growth is slowing, net payroll growth remains upbeat, partly attributable to a reduced level of layoffs throughout the economy.
Despite wet weather impacting on the construction sector, (with output falling by 1.9%), the UK economy grew 0.1% in February, boosted by production, (rising by 1.1%, compared to a fall of 0.3% in January), and manufacturing in areas such as the car industry. Figures like these may point to a green shoot recovery for the embattled UK economy. The Office for National Statistics noted that the economy grew, on a quarterly basis, for the first time since last summer, and upgraded January’s growth by 0.1% to 0.3%. Growth is likely to have been boosted by cuts in National Insurance and slowing price rises, meaning that businesses and households will have more confidence in their finances and therefore spending.
In Australia, comparison website Finder says the expansion of Qantas’ frequent flyer program is “a positive move”, with the airline promoting twenty million extra seats that will make it easier for the scheme’s members to book a flight when using their points. As with many other international frequent flying, it used to be relatively easy to earn points but extremely difficult to book the required seats. The website noted that “Qantas were hoping customers would instead use their points on hotels and buying goods from the Qantas site, both of which offer far lower value”, and that “what Qantas have done here is multiply the number of rewards seats available by five, with the drawback being that the new seats cost a higher number of points – from 2 to 3 times the usual Classic Rewards cost”.
It may surprise Australian readers that a country with a population of over twenty-six million, its Qantas Frequent Flyer and Velocity by Virgin Australia programs have more than fourteen million and eleven million members respectively. A lot has changed in the world since their introduction and now you do not even have to fly to participate in such schemes. There are three main players in the sector – the airline involved, its passengers and financial institutions offering branded credit cards. Who gains the most from them is debateable.
According to Qantas’ 2023 H1 reports, loyalty programs brought in US$ 660 million in revenue (more than double the 2019 revenue) and US$ 145 million in operating profit, with Velocity posting US$ 217 million and US$ 51 million. Furthermore, the carriers have the added advantage of not only creating the point system in the first place, but they decide the number of points required to pay for flights or upgrades – and can amend accordingly, by increasing the number of points required to take a flight, (or to buy a particular product). They can be sold on for money to the banks, (at zero cost until the points are redeemed, if ever), who then charge customers annual credit card fees to access these co-branded cards, which accumulate points and make further profit on every transaction. Then there are the consumers who need to consider two aspects of joining a loyalty programme – the best ways to earn the points and then to redeem them. If using a points-earning credit card, then the total balance should be paid off each and every month – otherwise the interest charged will negate any benefit, and additionally use the card for all your transactions. Before redeeming points, they should “know the programs well to maximise the earning opportunities, but also know the best ways to redeem your points”; in most cases, using points on flights is usually better value rather redeeming those points for products. The three main aims of any loyalty card are to gather data and then monetise that data, keep customers coming back, (the cost to maintain an existing customer is far less than recruiting a new one), and boost brand advocacy.
Another week with Boeing facing a new crisis after engineer Sam Salehpour blew the whistle on the plane maker, claiming safety concerns over the manufacturing of some of its 787 and 777 planes to US regulators. He claimed he was “threatened with termination” after raising concerns that Boeing were taking short cuts in its construction process; the plane maker said the claims were “inaccurate”. Shares in the plane manufacturer sank almost 2% on Tuesday, after the Federal Aviation Administration said it was investigating the claims, and the company reported it delivered just eighty-three planes to customers in the first three months of the year – the smallest number since 2021.
Although the FAA has imposed a monthly production cap of thirty-eight Boeing 737 MAX jetliners, it seems that the monthly output rate is fluctuating well below this level and in late March fell as low as single digits; Cirium Ascend, said Boeing flew thirteen MAXs in March, following eleven in February, with the monthly rate having peaked around thirty-eight a month in mid-2023. (Airbus, by contrast, flew an average of forty-six a month of its competing A320neos in Q1).This comes at a time when regulators are stepping up factory checks and workers slow the assembly line outside Seattle to complete outstanding work. Traditionally, production and deliveries went hand in hand, but the grounding of the MAX in 2019 and 2020 and disruption from the pandemic created a stockpile of surplus jets that mean it is harder now to glean the production rate from deliveries. Airbus has its own supply constraints and is producing around fifty A320neo-family jets a month, below the fifty-eight originally targeted early this year, as it faces ongoing shortages of maintenance capacity for some engines, leaving jets idle for months once in service.
Travel data firm OAG point to the fact that the global airline industry is facing a summer squeeze, with travel demand – at 4.7 billion – expected to surpass 4.5 billion pre-pandemic levels. The main reason seems to be the decline in new aircraft deliveries because of production problems, listed above, with the end result that some carriers are being forced to trim their schedules to cope with the lack of available planes, as they will receive 19% fewer aircraft than they initially expected. To ameliorate the problem, air carriers are spending billions on repairs to keep flying older, less fuel-efficient jets, and paying a premium to secure aircraft from lessors. Because of the supply/demand disequilibrium, there is every chance that some fares will be higher and that there is no chance that IATA’s forecast for a 9.0% annual growth in global airline capacity this year will now occur.
One beneficiary of this aviation mess is the aircraft leasing sector. Data from Cirium Ascend Consultancy shows that lease rates for new Airbus A320-200neo and Boeing 737-8 MAX aircraft have hit US$ 400k per month, the highest since mid-2008, with airlines spending 30% more on aircraft leases than before the pandemic. Because of the need to hold on to jets that are past their useful economic lives and require heavy maintenance that now takes several months, repair costs at United, Delta and American were up 40% higher last year from 2019. It is obvious who will have to pay for these increasing expenses – passengers, for whom this could turn into a Cruel Summer!
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